Analysts recommend these stagflation stocks.
In October, the U.S. consumer price index gained 6.2%, its highest inflation growth reading since 1990. The Federal Reserve has insisted elevated inflation will be transitory, but Fed Chair Jerome Powell admitted in September that inflationary pressures have been “frustrating” and elevated inflation levels will endure “longer than we had thought.” High inflation coupled with slowing economic growth creates the bearish economic condition known as stagflation. But not all stocks suffer during these periods. These seven buy-rated stocks have historically outperformed during periods of rising inflation and below-average economic growth, according to Bank of America analysts.
Dover Corp. (ticker: DOV)
Dover produces specialized industrial products and manufacturing equipment. Of the 165 companies with data available back to 1968, Dover has been the best-performing stock in the S&P 500 during periods of stagflation, according to Bank of America. The stock has averaged a 24.8% gain in these periods. Analyst Andrew Obin says Dover delivered with a third-quarter earnings beat and 2021 guidance hike despite raw material inflation and higher logistics costs. Obin says he expects earnings multiple expansion for Dover as investors fully value its margin expansion opportunity. Bank of America has a “buy” rating and a $205 price target for DOV stock, which closed at $166.43 on Dec. 2.
PerkinElmer Inc. (PKI)
PerkinElmer provides advanced scientific instruments to pharmaceutical, industrial and other customers. Analyst Derik de Bruin says PerkinElmer has effectively invested the cash flow it generated from its COVID-19 test sales into accretive deals that have helped boost core revenue growth and improve margins. PerkinElmer shares are up more than 85% since the beginning of 2020, but the stock has historically been a top performer during stretches of lagging economic growth and rising inflation. PerkinElmer has averaged a 21.1% gain during periods of stagflation. Bank of America has a “buy” rating and a $193 price target for PKI stock, which closed at $179.99 on Dec. 2.
Schlumberger Ltd. (SLB)
Schlumberger is a leading global oil field services company. Analyst Chase Mulvehill says the global oil exploration and production capital expenditures cycle should accelerate in 2022 amid a global energy crisis. Crude oil prices recently hit their highest level in seven years, causing President Joe Biden to release 50 million barrels of oil from the Strategic Petroleum Reserve. Mulvehill says Schlumberger is approaching its targeted debt leverage levels, suggesting that a dividend hike, share buybacks or a combination of both could be possible in 2022. The company has averaged a 17.3% gain during periods of stagflation. Bank of America has a “buy” rating and a $42 price target for SLB stock, which closed at $29.32 on Dec. 2.
Hershey Co. (HSY)
Hershey is a global leader in manufacturing chocolate, sweets, mints, gum and other treats. In November, Hershey announced a $1.22 billion buyout of Dot’s Pretzels LLC following its $425 million acquisition of Lily’s in June. Analyst Bryan Spillane says the Dot’s deal is in line with management’s strategy of expanding Hershey’s portfolio beyond candy and into other snacking categories. The deal also gives Hershey three additional manufacturing facilities and ownership of more premium brands. Historically, Hershey has generated an average return of 16% during stagflation periods. Bank of America has a “buy” rating and a $192 price target for HSY stock, which closed at $176.69 on Dec. 2.
Northrop Grumman Corp. (NOC)
Northrop Grumman is a government defense contractor that specializes in advanced military technology. Analyst Ronald Epstein says Northrop has been struggling with headwinds in its aeronautics systems segment, which will likely generate negative revenue growth in 2022. Epstein says Northrop has a best-in-class defense portfolio, which includes long-range capabilities, joint all-domain command and control and nuclear deterrence technology. The company’s space systems business also generated 22% revenue growth in the third quarter. Northrop stock has averaged a 14.5% gain in stagflation periods. Bank of America has a “buy” rating and a $460 price target for NOC stock, which closed at $352.57 on Dec. 2.
Williams Companies Inc. (WMB)
Williams Companies is a U.S. natural gas infrastructure business. Analyst Chase Mulvehill says Williams is his preferred way to invest in natural gas, which recently hit its highest prices in more than a decade. Mulvehill expects Northeast and Haynesville gas volumes will drive operating leverage for Williams and other gas infrastructure stocks. He says Transco pipeline volume growth and an impressive free cash flow profile make Williams an excellent investment. Williams has also averaged a 14.4% gain during past periods of stagflation. Bank of America has a “buy” rating and a $33 price target for WMB stock, which closed at $27.25 on Dec. 2.
McKesson Corp. (MCK)
McKesson is the largest U.S. pharmaceutical distributor. Analyst Michael Cherny says COVID-19 is a major earnings tail wind for McKesson, but the company’s other revenue streams are also solid. Cherny says COVID-19 benefits will likely start to wane in 2022, so investors should expect an earnings “reset” year ahead. However, he says strong trends in pharmaceutical scripts and ongoing operational discipline should return McKesson to its normalized earnings growth starting in fiscal 2024. McKesson shares have averaged a 13.4% return during past periods of stagflation. Bank of America has a “buy” rating and a $250 price target for MCK stock, which closed at $220.41 on Dec. 2.
Best stagflation stocks to buy:
— Dover Corp. (DOV)
— PerkinElmer Inc. (PKI)
— Schlumberger Ltd. (SLB)
— Hershey Co. (HSY)
— Northrop Grumman Corp. (NOC)
— Williams Companies Inc. (WMB)
— McKesson Corp. (MCK)
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